Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

Market cap to GDP divided by listed company’s contribution to GDP is the only way to do this properly, I’m sure publicly listed companies in 1929 contributed far less a percent of US gdp than they do now.

It seems to me that in considering a chart like this, one should also be contemplating a chart that illustrates the increasing debt-to-GDP ratio over time. Surely some of that government spending is winding up in the stock market, and in corporate earnings.

Are you retrenching and waiting to see which side of the fence you will come down on?
Needless to say the immediate issues and markets nerves are far more compelling and in need of interpretation right now than any graph…

So, Barry, still bunkered down in cash? Leaning any particular way? Are we at the mercy of the hands of the euro governments and their plans and execution? Bank bailout coming for Europe to quell the rising LIBOR rates? Another Panic selling leg down to test the 200 moving averages for good measure?

While we all are wading out at sea…care to drop a pearl or two of insight/wisdom our way…?

“On a macro basis, quantification doesn’t have to be complicated at all. Below is a
chart, starting almost 80 years ago and really quite fundamental in what it says.
The chart shows the market value of all publicly traded securities as a percentage
of the country’s business–that is, as a percentage of GNP. The ratio has certain
limitations in telling you what you need to know. Still, it is probably the best single
measure of where valuations stand at any given moment. And as you can see,
nearly two years ago the ratio rose to an unprecedented level. That should have
been a very strong warning signal.

… For me, the message of that chart is this: If the percentage relationship falls to the
70% or 80% area, buying stocks is likely to work very well for you. If the ratio
approaches 200%–as it did in 1999 and a part of 2000–you are playing with fire.
As you can see, the ratio was recently 133%.

Even so, that is a good-sized drop from when I was talking
about the market in 1999. I ventured then that the
American public should expect equity returns over
the next decade or two (with dividends included and 2%
inflation assumed) of perhaps 7%. That was a
gross figure, not counting frictional costs, such as
commissions and fees. Net, I thought returns might be 6%.

Today stock market “hamburgers,” so to speak,
are cheaper. The country’s economy has grown and
stocks are lower, which means that investors are getting more for their money. I
would expect now to see long-term returns run somewhat higher, in the
neighborhood of 7% after costs. Not bad at all–that is, unless you’re still deriving
your expectations from the 1990s.”

I had to post in this thread, and agree with what most people have been saying: this chart is stupid.

There is nowhere near enough data contained in this chart to draw any inferences at all, and the implication that the chart’s creator is trying to make (that we are 2x the “average” market cap to GDP, and therefore due for a correction) is asinine.

Here’s how the chart should be fixed.
1. Adjust GDP to be total revenue of all listed companies (note: this would include revenues outside of the US). If you still wanted to use US GDP as some kind of proxy, then include some adjustments for non public company contribution to GDP and adjustments for public company foreign revenue.
2. Profit margins need to be added.
3. Interest rates should be added.

Then you would have the basics of a USEFUL chart. You could argue that the 60% the chart shows in the 80s versus the 113% today could be totally explained with just interest rate adjustments (i.e. P/E should go up in permanent low interest rate environments) and we may in fact be UNDERvaluing the market here.

You’ll notice that high market capitalization is associated with slow wage growth. Basically, money that could have been invested and used to improve living standards has gone into the stock market. According to the New York Stock Exchange, less than a dollar in a thousand spent on “investments” goes to improving our productive capacity, so “investing” has been nothing but a drain on our society.

I treat “market cap” as nothing more than an indication of the size of the pile of chips in the stock market roulette table. That said (only to establish my perspective, not an attempt to persuade others to adopt it), the history texts tell us that back in the late 1920s, 10% margin requirements lead pretty much every man/woman/family pet to be up to their eyeballs in leveraged debt, all plunked onto the Wall Street roulette table.

But this … is really sumptin’ else, and fills me with appreciation for the amount of pumpin’ of credit into the markets that Easy Al managed during his tenure, which seems to have found its way into the stock markets, after the commodities and real estate bubbles have popped. Or maybe this is where all the money that was made in the housing business, selling bum mortgages several times over, has finally settled. It’s a wonder that the roulette table doesn’t collapse under the weight of all those chips.

Who knew that a dismal future with soaring taxes and failing debt issues everywhere could spark such investment interest? I guess when it’s the only game in town, ya gotta join the party, and while the music is playin’ ya gots ta gets up and dance!

When the final bubble gives way, it’s gonna be a whole new chapter in the history books.

Barry, it would help to have the total revenues of the companies as a % of GDP on this chart to get a sense of how the increase in publicly traded companies over time is affecting this. Because market cap includes the PV of future growth and GDP doesn’t, I’m not really sure these series’ are as comparable as they would seem. The high values of equities may represent the expected future growth because of technology, globalization, etc.. If those benefits are running out because labor arbitrage and consumer arbitrage is becoming exhausted and because technological improvements are now more or less incorporated into business processes, we may indeed see a mean reversion process occurring; but if additional globalization and technological advancement is reasonable to assume, it could stay high.

Is there a chart indicating the total earnings as a percentage of total market capitalization of all public companies over the past 80 years? (This will not be the same as P/E ratios which does not give a weighting to company market cap.)

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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